Tag: A Level Business

IB Business & IB Economics.

For the first time since 1945, as from today, November the 11th, 2017, new labour laws come into force in Brazil. The new laws have been welcomed by the business community, who feel that the laws bring Brazil’s labour market into the 21st century, but many, including the Trade Unions and the poor, have protested against the changes.

In economic language these types of changes are often referred to as ‘ making the labour market more flexible’. In economics it is an example of a ‘ market based supply side policy’ the aim of which is to increase economic growth and shift the long run aggregate supply curve of the economy to the right (see below).

Agg. Supply Curve Shifting Right.

The laws make it easier for companies to hire and fire workers, allow companies to use their workforce in more flexible ways, which will cut the cost of labour for many businesses. However, they are controversial and some feel that Brazil’s poor will be worst hit by the changes.

It is difficult to summarize all the changes to the law in such a short blog, but here are some of the highlights:-

It will be easier and less expensive to hire and fire workers.

Meal vouchers, medical insurance, bonuses and travelling expenses will no longer be classified as ‘ employee remuneration’ as they are now.

Compulsory union contributions have been abolished. They will be voluntary from now on.

Allowing companies to split their employee’s vacation time into three separate periods. Previously holidays had to be taken over one period of 30 days per year.

From now on employers will not pay their workers overtime if they stay on at their work premises because of poor weather or unsafe conditions.

Time spent travelling to work is no longer considered as ‘ working hours’. In the past it was.

Employers can now bargain directly with their workers to set pay and conditions, rather than with a Trade Union.

It will be easier to hire workers on different types of contracts – part-time , remote workers (working from home) and intermittent workers.

Companies with 200 or more employees will have to set up a Worker Representation Committee.

Outsourcing will now be allowed , even for ‘core business’ functions. Previously it was only allowed for peripheral business functions like catering and security.

‘ Equal pay for equal work’ rules will be more flexible. Previously workers working on different business sites, or even in the same city, could claim equal pay for equal work. Now it will be restricted to workers only working on the same site.

He traces the origins of the problem back to 1981 when Jack Welsh, the then CEO of General Electric, coined the term ´maximizing shareholder value´. According to Welsh, this is what companies should do; aim to raise company share prices by increasing profits as much as possible and give as much dividend back as possible to shareholders. Managers were encouraged to do this by having part of their pay in share options. This created what Chang calls ‘an unholy alliance’ (P17) between shareholders and senior executives, both of whom benefit if the share price of their companies rise and rise.

What were the consequences of these policies? According to Chang ” Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits and wage increases were surpressed …. The suppliers and their workers, were also squeezed by continued cuts in procurement prices” (P18). In other words, the other stakeholders in the business lost out.

Another strategy, moreover, aimed at maximizing shareholder value became more and more popular – share buybacks.This is when a company uses it’s own profits to buy back it’s shares in order to artificially increase their value. According to Chang, prior to 1980 share buybacks made up just 5% of US company profit spending, by 2007 this figure had reached 90% and in 2008 just as the economic crisis was taking hold, reached 280% (P20)

These policies, moreover, don’t even make good business sense. Less investment by companies (most of the money is being used to buy back shares or is being given to the shareholders) leads to lower long term productivity. Workers who are forced to accept wage cuts and more temporary or short term contracts, become demoralized and demotivated and consequently productivity falls.

Chang backs up his arguments with some astonishing statistics. Quoting the research of Willam Lazonik, a business economist, he says “…Had GM not spent the $20.4 billion that it did in share buybacks between 1986 and 2002 and put it in the bank (with a 2.5% after tax annual return), it would have had no problem finding the $35 billion that it needed to stave off bankruptcy in 2009” (P20). (GM, the large US automobile manufacturer, went bankrupt in 2009 and had to be bailed out at great expense using taxpayers money by the US government).

On the IB Business course we learn that businesses maximizing their profits is generally a good thing, that the concepts of limited liability and company legal structures such as the public limited company (plc) are positive, useful things for society, and that a good business manager should consider the long term interests of all the stakeholders in the business. However, is the concept of limited liability really good for society, are plc’s and the way they are run nowadays positive for society, and do business managers really take into consideration the long term interests of all the stakeholders in the business?

Some business analysts think not. Ha-Joon Chang, in his popular book ” 23 Things They Don’t Tell You About Capitalism*”, argues that these things have in many ways been bad for society, that the way plc’s have been run over the last few decades has generated more social harm than good and that, in reality, the interests of just two groups of stakeholders – company shareholders and senior executives – have taken precedence above all others.

When capitalism and business as we know it now was in it’s infancy, owning and running a business was much more risky than it is today. If your business went bankrupt and you ended up owing lots of money to creditors you could have lost all of your personal possessions and have been thrown into a debtors prison. Nowadays we have this concept of limited liability whereby you only lose the original amount of money you invested in the business and your personal possessions are protected.

What a lot of people don’t realize, however, is just how controversial the joint stock company (the limited liability company as we now know it) was when it was first invented. Adam Smith, one of the founding fathers of economics and modern capitalism disapproved saying ” The directors of [joint stock companies] … being the managers rather of other people’s money than their own, it cannot well be expected that they would watch over it with the same anxious vigilance with which the partners in a private copartnery [ i.e. partnership with unlimited liability] frequently watch over their own. “(P 13, Chang book). His disapproval of limited liability reflected the current wisdom of the time; people felt that managers of limited liability companies would take greater risks because they were managing companies funded in most part by other people’s money rather than their own. Indeed, when the joint stock company was first invented, only very speculative, risky ventures in the national interest took the form of joint stock companies, such as the Dutch East India Company set up by Holland in 1602.

As countries industrialized, however, and there was more and more of a need for investments in large, expensive investment projects such as railways, steel and chemical plants, limited liability companies became more and more popular. Indeed, this is the main argument for the social usefulness of plc´s as institutional structures – they enable finance to be raised for big, risky investment projects which otherwise would probably not be funded. Nowadays, they are taken for granted as being essential to the modern business world.

* = This is an excellent book which all IB Business and IB Economics students should read. See image below. I will be using it quite a lot in the next few posts I make. You can buy it on Amazon by clicking the link above.